Roger Babson, the eccentric who invented economic forecasting

I have done a number of posts about the nature of forecasting. You will know that I am a sceptic. I have posted all those jokes about economists like:

Economists give their predictions to a digit after the decimal point to show that they have a sense of humour

He has predicted five of the last two recessions.

I also did a series called really terrible predictions. You know the kind of thing:

The Soviet economy is proof that, contrary to what many sceptics had earlier believed, a socialist command economy can function and even thrive. Economist Paul Samuelson

Airplanes are interesting toys, but they have no military value. Marshal Ferdinand Foch

Next Christmas the iPod will be dead, finished, gone, kaput. Sir Alan Sugar

Before man reaches the moon, your mail will be delivered within hours from New York to Australia by guided missiles. We stand on the threshold of rocket mail. Arthur Summerfield

Of these, one of the most lambasted was by Yale University Professor of Economics, Irving Fisher, who made this extraordinary claim: “Stocks have reached what looks like a permanently high plateau.” He made it on October 16, 1929 apparently Fisher was a smart guy but he will go down in history for that prediction. He was one of the first of the modern breed of economic forecasters. Today I will be looking at another pioneer in this field Roger Ward Babson

Born in 1875, Babson was the unlikely founder of today’s economic forecasting. Babson was an avid Newtonian, whose theories were based on the Newtonian assumption that any economic expansion would be matched by an equal and opposite contraction. Babson and his staff produced Babson’s Reports, a weekly newsletter which was among the first to use systematic statistical analysis of economic data to predict future economic conditions. Babson combined several different types of time-series data into a graph of economic activity, called the Babson Chart, which he relied on to predict future business cycles. It is hard for us to imagine but before the last century commentators didn’t talk about “the economy” like we do today. There was no such thing as GDP. The Babson Chart showed a complex single system that operated according to its own internal dynamics. It was a system that could be studied and that would yield predictions. Here is a picture of his “Babson Chart:

I would not call this science. His methods may have had the patina of science, but what he really excelled at was marketing. But it’s often better to be lucky than right. His moment of triumph came in the autumn of 1929 when he became known as the primary economic forecaster to predict the famous stock market crash. On September 5th, 1929 he warned:

“A crash is coming, and it may be terrific. …. The vicious circle will get in full swing and the result will be a serious business depression. There may be a stampede for selling which will exceed anything that the Stock Exchange has ever witnessed. Wise are those investors who now get out of debt.”

55 days after Babson’s speech, on 29th October, 1929, the market suddenly went into a free-fall, dropping 12% in its first day. Just about every other professional economist had missed it. Because of the dramatic nature of the stock market crash, their failure to predict this event made them the subject of ridicule.

What fascinates me about Babson is his eccentricity. A long-time sufferer from tuberculosis, Babson liked to work with the windows open, even in cold weather, and designed special coats for himself and his staff to wear. Babson was involved in a number of campaigns including bizarre dietary reforms, eugenics and the prohibition of alcohol. Indeed, he stood for the Prohibition Party in the Presidential race of 1940, in which he finished behind Franklin Delano Roosevelt of the Democratic Party, Republican Wendell Willkie and Norman Thomas of the Socialist Party of America. During the Great Depression he commissioned unemployed stonecutters to carve inspirational inscriptions, such as GET A JOB, TRUTH, and IF WORK STOPS, VALUES DECAY, on approximately three dozen boulders in Dogtown, Massachusetts.

What really drew me to Babson, though, was his singular war on gravity. Throughout his life, he had major beef with, of all things, the force of gravity. It all seems to go back to a childhood tragedy in which his sister drowned. He explained in it all in a 1948 essay entitled “Gravity – Our Enemy Number One”:

“Yes, they say she was “drowned”, but the fact is that … she was unable to fight Gravity which came up and seized her like a dragon and brought her to the bottom. There she smothered and died from lack of oxygen.”

In the essay he argued that “Old Man Gravity” was directly responsible for millions of deaths each year, as well as countless accidents. Broken hips and other broken bones as well as numerous circulatory, intestinal and other internal troubles were directly due to the people’s inability to counteract Gravity at a critical moment.

In 1948 Babson established the Gravity Research Foundation (GRF). It operated out of New Boston, N.H., which was located 60 miles north of Boston, Mass. It was situated there to be a safe distance from Boston in case the city were bombed in a future World War III.

The GRF’s mission was to collect and disseminate gravity-related information as well as fund promising research projects, including, perhaps, some kind of gravity shield. Curiously over time the foundation was able to morph into a respectable body. Its annual essay prize has drawn respected researchers, including Stephen Hawking, mathematician/author Roger Penrose Nobel laureate George Smoot, Freeman Dyson, and Martin Rees

Babson would live until 1967, dying at the age of 91. He was one of those great American eccentrics.